Federal monetary system regulators are concerned that lenders are over-burdened with riskier home equity loans; their recommendations could make it tougher for some consumers--especially those who now barely qualify--to land and keep home equity loans.

The Federal Reserve is concerned about a heightened level of warnings from economists about escalating home prices, industry fraud, the potential for higher interest rates and other factors that contribute to the potential for a housing bubble that goes bust. In light of these concerns, the Federal Reserve has joined with the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision and the National Credit Union Administration, to issue "Credit Risk Management Guidance For Home Equity Lending."

The report says the quality of lenders' home equity portfolios is of concern, especially if "interest rates rise and home values decline. Sound underwriting practices and effective risk management systems are essential to mitigate this risk."

The regulators identified the following practices as risk factors warranting scrutiny:

* Interest-only loans with no principal amortization for a protracted period;

* Higher loan-to-value (LTV) and debt-to-income ratios;

* Permitting lower credit scores for loan approval;

* Greater use of automated property valuation for appraisals;

* An increased number of transactions generated through a loan broker or other third party;

* Limited or no documentation of a borrower's assets, employment and income.

Most of these approaches to approving home equity loans, as well as first mortgages, have gained widespread appeal in recent years as home prices have escalated because they greatly improve the chances of those who may not qualify under stricter guidelines, but who can actually afford to buy a home.

"Most lenders that give these loans without income and asset documentation require good credit or a large amount of equity in the property. The lenders' studies have shown that one's credit history and equity position are better indicators of one's likelihood of paying their bills than one's income or assets," says Brandon Knapp, a mortgage planner with Lawson & Associates Mortgage Planners in Campbell.

The most widely quoted prime rate, the Wall Street Journal prime rate, is a consensus prime rate based on the prime rate offered by 75 percent of the nation's 30 largest banks. It moves in lock-step with changes to the benchmark federal funds rate set by the Federal Reserve. In the past year, the feds have increased the benchmark rate eight times and the prime has followed, moving two full percentage points from 4 percent last June (the lowest level since 1958) to 6 percent this May.

While the guidelines tell lenders and their underwriters to toe the line by following a host of loan monitoring and underwriting procedures, consumers likely will also have to maintain their income, credit, debt and other qualifying financials on par with the levels that originally qualified them for the loan.

Otherwise, lenders who adhere strictly to the guidelines could call loans due, cut off unused credit or otherwise take steps to reduce risk caused by marginal loans. Loans typically come with provisions that allow lenders to take action under certain circumstances. Consumers should read the small print to determine what those circumstances are for their loan.

"I've never seen a lender withdraw credit because someone's credit changed, but if somebody can call a loan or take away a line of credit, they need to disclose that to consumers. When you take out a line of credit you are usually depending on it, and if it's suddenly taken away, that could cause you to lose your home," said Cindy Marcus, an agent with RE/MAX Santa Barbara-Montecito-Goleta.

Lenders with a high concentration of home equity loans are being advised to scrutinize appraisals and delinquencies and keep an eye on the performance of large groups of loans concentrated by geographic market, property type, high loan-to-value and other risk factors.

They are also advised to have in place programs to help consumers in trouble.

When it comes to recommendations for lenders that could prompt consumers to maintain their financial status, the federal guidelines call for:

* Periodically refreshing credit risk scores on all customers;

* Using behavioral scoring and analysis of individual borrower characteristics to identify potential problem accounts;

* Periodically assessing payment patterns, including borrowers who make only minimum payments over a period of time or those who use the line of credit to make payments on the line of credit.

* Obtaining updated information on the home's value when significant market factors indicate a potential decline in home values, or when the borrower's payment performance deteriorates and there's a greater reliance upon the home as collateral.

"Just pulling the rug out will cause havoc in the economy. If you can't make payments and have to sell quickly, if that's many owners, that could affect the whole market," Marcus said.

Real estate writer Broderick Perkins, executive editor of San Jose-based DeadlineNews.Com, writes regularly for this newspaper.